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Production via Leverage: Southwestern Energy’s Faustian Bargain?

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Southwestern Energy’s low cash and high debt

As of March 31, 2016, Southwestern Energy’s (SWN) total debt stood at ~$6.4 billion. With ~$1.6 billion in cash and cash equivalents, Southwestern Energy’s net debt was ~$4.8 billion at the end of 1Q16.

At the end of 1Q16, Southwestern Energy temporarily borrowed $1.6 billion and returned it on April 1, 2016. Due to this end of quarter window dressing, Southwestern Energy’s liquidity looks strong. However, adjusted for this temporary borrowing, Southwestern Energy’s 1Q16 cash and cash equivalent comes in at only ~$47 million, and its adjusted net debt is almost equal to its adjusted total debt at ~$4.8 billion.

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Southwestern Energy’s debt and equity trends

From 4Q13 to 4Q15, Southwestern Energy’s total production expanded by ~48%, but this expansion came at a cost of higher debt for the company. In 4Q14, Southwestern Energy acquired Southwest Appalachia properties from Chesapeake Energy (CHK) for ~$5.0 billion. In 1Q15, it acquired certain assets from Statoil (STO) and WPX Energy (WPX) for ~$365 million and ~$288 million, respectively. Due to these acquisitions, Southwestern Energy is carrying a much higher debt on its balance sheet, as the above chart shows. Despite issuing common equity and paying down debt in 2015, as of 1Q16, Southwestern Energy’s total debt is ~220% higher, and total debt to equity is ~1,038% higher when compared with where it stood at the end of 4Q13.

One thing that didn’t work in Southwestern Energy’s favor is the timing of these acquisitions. Natural gas (UNG) (UGAZ) (DGAZ) has been in a continuous decline for the most part since these acquisitions. As seen in the previous part of this series, higher costs and lower natural gas prices have resulted in steep declines in Southwestern Energy’s total profit margin. This caused Southwestern Energy’s retained earnings to decline from ~$3.6 billion in 4Q14 to -$2.2 billion in 1Q16. The decline in retained earnings, in turn, impacted Southwestern Energy’s total stockholders’ equity, causing it to decrease from ~$4.7 billion in 4Q14 to ~$1.1 billion in 1Q16.

Southwestern Energy’s leverage trend

Due to the steep increase in its total debt and a steep decrease in its equity, Southwestern Energy’s total debt-to-equity ratio, or leverage, rose from ~54% in 4Q13 to ~561% in 1Q16. Even if total debt is adjusted for the temporary borrowings, as discussed above, SWN’s leverage comes in at ~421%. This level of leverage is one of the highest among the S&P 500 (SPY) oil and gas companies.

A higher debt-to-equity ratio usually indicates a higher risk of default, because it hints at the difficulty a company could have in repaying or servicing this debt via the assets that the debt financed.

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